[Federal Register: February 3, 1998 (Volume 63, Number 22)]
[Rules and Regulations]
[Page 5643-5657]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03fe98-16]

[[Page 5643]]

_______________________________________________________________________

Part III

Department of the Treasury

_______________________________________________________________________

Fiscal Service

_______________________________________________________________________

31 CFR Part 203

Payment of Federal Taxes and the Treasury Tax and Loan Program; Final
Rule

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DEPARTMENT OF THE TREASURY

Fiscal Service

31 CFR Part 203

RIN-1510-AA37


Payment of Federal Taxes and the Treasury Tax and Loan Program

AGENCY: Financial Management Service, Fiscal Service, Treasury.

ACTION: Final rule.

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SUMMARY: The Financial Management Service is issuing this final rule to
implement provisions of the North American Free Trade Agreement
Implementation Act (NAFTA), as amended. NAFTA requires the development
and implementation of an electronic funds transfer (EFT) system for the
collection of certain depository taxes. This regulation implements the
Electronic Federal Tax Payment System (EFTPS) by prescribing rules for
financial institutions and Federal Reserve Banks that use EFT
mechanisms to process Federal tax payments through the EFTPS. The EFTPS
began operation in the fall of 1996.
    This regulation also updates the rules governing the changes to the
Treasury's investment program that were necessitated by the
implementation of this EFT system.

EFFECTIVE DATE: March 5, 1998.

ADDRESSES: Cynthia L. Johnson, Director, Cash Management Policy and
Planning Division, Financial Management Service, LCB 420, 401 14th
Street, S.W., Washington, D.C. 20227.

FOR FURTHER INFORMATION CONTACT: Michael G. Dressler, Senior Financial
Program Specialist; Cynthia L. Johnson, Director, Cash Management
Policy and Planning Division, 401 14th Street, S.W., Washington, D.C.
20227, at (202) 874-6590; or Randall S. Lewis, Principal Attorney, at
(202) 874-6680. A copy of this final rule is available for downloading
on the Financial Management Service home page at the following address:
http://www.fms.treas.gov/regs.html.

SUPPLEMENTARY INFORMATION:

Background

    This regulation is authorized by the North American Free Trade
Agreement Implementation Act (NAFTA), Public Law 103-182, Section 523,
107 Stat. 2057, 2161 (1993), the substantive provisions of which are
codified at 26 U.S.C. 6302(h). NAFTA mandates that the Secretary of the
Treasury (Secretary) phase-in the collection of a minimum percentage of
certain types of depository taxes by electronic funds transfer (EFT)
and develop and implement an EFT system for the collection of such
taxes. The Secretary has delegated responsibility to the Internal
Revenue Service (IRS) for the former and to the Financial Management
Service (FMS) for the latter. With the enactment of NAFTA, the FMS
achieved its longstanding goal to collect depositary taxes
electronically. This regulation implements the FMS' Electronic Federal
Tax Payment System (EFTPS), which began operation on October 28, 1996.
    On September 30, 1996, the FMS published in the Federal Register a
notice of proposed rulemaking (NPRM) that would govern the deposit of
Federal taxes using EFT mechanisms (61 FR 51186). The NPRM also
proposed rules updating Treasury's investment program to reflect the
impact of the new electronic system. The original closing date for the
submission of comments was November 21, 1996. However, the FMS
published a notice in the Federal Register extending that date to
January 13, 1997 (61 FR 59211).

Comments on the Proposed Rule

    The title of this part has been changed in two steps for two
reasons. The first change from ``Treasury Tax and Loan Depositaries''
to the NPRM designation as ``Treasury Tax and Loan Depositaries and the
Payment of Federal Taxes'' reflects the importance of the addition of
the EFTPS. Secondly, the title used in this Final Rule reverses the
order in the NPRM title to shift the emphasis from the Treasury Tax and
Loan (TT&L) depositaries to the payment of Federal taxes through the
EFTPS because under this Final Rule at Sec. 203.9, ``a financial
institution does not need to be designated as a TT&L depositary in
order to process electronic Federal tax payments.''
    Two sections of the NPRM, Secs. 203.4 and 203.5, have been combined
in this Final Rule as Sec. 203.4 causing all sections of the Final Rule
after Sec. 203.4 to be renumbered. For clarity, each section citation
in this Final Rule is identified as either an NPRM or Final Rule
citation. For example, the NPRM Sec. 203.11 was the section covering
Enrollment. All references to the NPRM section on Enrollment will
identify it as NPRM Sec. 203.11 (emphasis added). In the Final Rule,
the section covering Enrollment is Sec. 203.10. Therefore, all
references to the Enrollment section of the Final Rule will identify it
as Sec. 203.10 in the Final Rule (emphasis added).
    By the close of the January 13, 1997, comment period, the FMS
received comments on the NPRM from twelve organizations: six financial
institutions and six industry trade associations. The following
includes a discussion of the significant and most heavily commented
upon issues:

Conformance With Industry Automated Clearing House (ACH) Rules

    Commenters expressed concern with certain NPRM provisions that
would require financial institutions to adhere to a set of rules
different from private industry ACH rules. Eleven of the twelve
commenters advocated the adoption of the National Automated Clearing
House Association (NACHA) Operating Rules for ACH processing,
enrollment, compensation, and/or credit reversals for electronic
Federal tax payments.
    Currently, the FMS is proposing a revision of 31 CFR Part 210 which
considers adoption of NACHA rules wherever practicable. The revision as
proposed would address the role of NACHA rules in all Federal payments
and collections made through the ACH system. However, as the examples
that follow illustrate, Part 203 requires certain exceptions to the
wholesale adoption of industry rules due to EFTPS program
considerations. Therefore, ACH entries governed by Part 203 are not
subject to any provisions of Part 210 that are inconsistent with Part
203.
    The FMS understands the commenters' interest in having a uniform
set of rules governing both commercial and Federal transactions and has
recognized these concerns by revising this Final Rule to conform with
commercial operating rules to the extent practicable. For example, the
FMS has revised the Final Rule to conform to commercial operating rules
for both ACH credit reversals and the waiting period between the
origination of a prenotification entry and the first payment.
    However, Treasury, as an executive agency within the Federal
Government, is constrained from the wholesale adoption of commercial
operating rules. For example, the Internal Revenue Code provisions
governing the disclosure of returns and return information preclude
Treasury from adopting the commercial operating rules for electronic
enrollments. In addition, the FMS is constrained from adopting
commercial operating rules that would require Treasury to pay interest
for payments erroneously made by financial institutions. Specifically,
such interest is not recoverable from the United States unless
expressly provided by statute. The FMS has not identified any statute
that would authorize Treasury to pay such interest.

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Enrollment and Enrollment Liabilities

    Section 203.11(a) of the NPRM provided that the taxpayer may enroll
in EFTPS using either a paper-based or electronic enrollment method.
Section 203.11(b)(2) of the NPRM allowed a financial institution to
assist its customers by offering electronic enrollment. However, even
if the financial institution offered electronic enrollment, a
representative of the financial institution would have to verify and
sign an enrollment form, and provide a paper copy of the completed form
to the taxpayer for the taxpayer's signature and submission to the
Treasury Financial Agent (TFA).
    Five commenters were concerned that no details were provided on how
an electronic enrollment process would work and recommended that the
FMS adopt procedures developed by NACHA to transmit enrollment data
through the ACH using the standard entry class code, ``ENR.'' One
commenter suggested enrolling taxpayers through the EFTPS home page on
the Internet. Additionally, five commenters questioned the need for a
paper copy of the enrollment form to be submitted to the TFA when an
electronic enrollment option is used. One commenter further recommended
that the FMS send back an acknowledgment file including an
acknowledgment number that could take the place of the taxpayer's
written signature.
    Section 203.10 of the Final Rule deletes all references to
electronic enrollments since such electronic processes would not
eliminate the IRS' need for a paper copy of an enrollment form signed
by the taxpayer. Currently, the IRS requires the taxpayer's written
signature for all enrollments in EFTPS. The written taxpayer signature
provides the IRS with the requisite authority to disclose to the TFAs
and to the taxpayer's financial institution the confidential taxpayer
return information necessary to effect enrollment and payment
transactions, provides the TFAs with the authority to initiate debits
to the taxpayer's account, and provides the IRS with authority to
resolve issues related to enrollments and payments. Until an all
electronic enrollment process becomes feasible for IRS tax payments,
taxpayers will continue to enroll in the EFTPS by means of paper
enrollment forms.
    Notwithstanding the deletion of the hybrid electronic/paper
enrollment process from this Final Rule, the FMS understands that the
IRS is undertaking efforts towards accepting electronic signatures.
Treasury also will continue to work with entities such as NACHA to
determine the feasibility of using the ENR enrollment standard entry
class code for EFTPS enrollments, and may look at other options for an
all electronic enrollment process in the future.
    NPRM Sec. 203.11(c) provided that if a taxpayer enrolled for the
ACH debit method, ``* * * an authorized representative of the financial
institution shall verify the accuracy of the financial institution
routing number, taxpayer account number, and taxpayer account type * *
* [and] shall sign the enrollment form attesting to the accuracy of the
financial institution information.''
    Five commenters suggested that it is unnecessary and inappropriate
for Treasury to require a financial institution to sign the enrollment
form to verify bank routing and account numbers. The commenters stated
that there is no way to verify that the signature is an authorized
signature of a bank representative and that the banking information
would be verified in the prenotification process. Another commenter
supported the requirement for financial institutions to sign the
enrollment form since it provides taxpayers with an opportunity to talk
to their financial institutions and to ask questions.
    The FMS agrees with both sets of comments, and has balanced both
interests in the Final Rule. Specifically, Sec. 203.10(c) of the Final
Rule deletes the requirement that a financial institution sign the
enrollment form, but requires the financial institution to verify
certain information upon the specific request of the taxpayer. A
financial institution may perform such verification by telephone.
    One commenter requested additional information on the status of an
enrollment if the form is not signed by a representative of the
taxpayer's financial institution, and asked what, if any, liability is
assumed by the financial institution if the form is unsigned or signed
with inaccurate information. Because the Final Rule deletes the
requirement that an authorized financial institution representative
sign the enrollment form, such enrollment forms will be processed
without a financial institution signature, and the financial
institutions will not accrue any liabilities if authorized
representatives do not sign such forms. However, the FMS may hold such
financial institutions liable under Sec. 203.14(a) of the Final Rule if
taxpayers request verification of banking data, and the financial
institutions fail to identify incorrect banking data that result in a
late tax payment.
    One commenter recommended that Treasury modify the enrollment form
to require a taxpayer to obtain the signature of a financial
institution representative as evidence of permission to use ACH credit
origination services to make EFTPS payments. The FMS recognizes the
importance of a taxpayer discussing the provision of ACH credit
services with its financial institution before the taxpayer sends the
enrollment form. Accordingly, the FMS has revised the enrollment form
to instruct taxpayers electing the ACH credit option to verify in
advance whether the financial institution is capable of providing ACH
credit origination services.
    One commenter inquired whether a taxpayer could enroll via a
prenotification entry. The prenotification entry cannot be used to
enroll a taxpayer because it does not provide all the required
information. Taxpayers must enroll as prescribed in Sec. 203.10 of the
Final Rule.

Prenotification

    NPRM Sec. 203.13(b)(1) required financial institutions that receive
an ACH debit entry to ``timely verify the information contained in the
ACH prenotification entry.'' Three commenters sought clarification on
what information the financial institution is required to verify in the
prenotification or zero dollar entry it receives. One financial
institution commenter asked whether financial institutions must verify
the taxpayer identification number (TIN). Section 203.12(b)(1) of the
Final Rule clarifies that financial institutions need to verify the
account number and account type, and not the TIN. Moreover, because the
TFAs will not originate zero dollar entries, financial institutions
will need to verify only information in prenotification entries.
    NPRM Sec. 203.13(c)(1) provided that the financial institution
``shall originate an ACH credit prenotification entry that may be in
the form of a zero dollar entry'' and that credit entries may not be
initiated less than 10 calendar days after the date the prenotification
was transmitted. Some commenters expressed a preference for
prenotification entries and some expressed a preference for zero dollar
entries. Two commenters opposed the mandatory use of prenotification
entries, and one favored it. Several commenters pointed out that the
NACHA rules make prenotification entries optional. They noted that it
would require computer system modifications to identify Federal tax
payments in several situations: where a

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file could contain Federal tax payments among many other types of
payments, and where the credits are triggered by customers themselves.
Nine commenters were critical of the 10 calendar day waiting period
between origination of a prenotification or zero dollar entry and the
first payment. Several pointed out that the NACHA rules were changed in
March, 1997, to require a six business day waiting period between
prenotification entries and the first payment.
    The FMS recognizes the merits of these comments and has revised the
Final Rule. Specifically, Sec. 203.12(c)(1) of the Final Rule clarifies
that the FMS will accept either an ACH prenotification entry containing
the TIN in the entry detail record (no addenda) or the zero dollar
entry with the TIN in the addenda record. The TFA will use the
information to verify with the IRS that the TIN is valid and
corresponds with an enrolled taxpayer. The FMS has limited the
requirement that financial institutions originate prenotification
entries for ACH credits. Under the Final Rule, a prenotification or
zero dollar entry is not required unless specifically requested by the
taxpayer. Financial institutions should note, however, that guidance
sent from the TFAs following enrollment suggests that taxpayers
instruct their financial institutions to originate zero dollar
transactions or prenotification entries prior to the first payment.
Consequently, financial institutions will have to be able to originate
such entries. The FMS also has deleted the 10 calendar day waiting
period between the origination of a prenotification entry and the first
payment in light of the NACHA rules.

Prenotification Liabilities

    The FMS received a number of inquiries regarding what liability, if
any, is assumed by financial institutions in the prenotification
process. In the context of ACH debits, the TFA will initiate a
prenotification, not a zero dollar entry, for each taxpayer enrolling
for ACH debit. Sections 203.12(b)(1) and (2) of the Final Rule require
the financial institution receiving an EFTPS prenotification to
``timely verify the account number and account type contained in the
ACH prenotification entry [and] timely and properly return a
prenotification entry that contains an invalid account number or
account type, or is otherwise erroneous or unprocessable.'' In
addition, Sec. 203.14(a) in the Final Rule clarifies NPRM
Sec. 203.15(a) by providing that the FMS may assess interest where a
financial institution failed to respond to an ACH prenotification entry
as required in Secs. 203.12(b) and 203.12(c) of the Final Rule, where
such failure resulted in a late tax payment. In the context of ACH
credits, the FMS may hold a financial institution liable under
Sec. 203.14(a) of the Final Rule if a late tax payment results from the
financial institution's failure to initiate a taxpayer-requested
prenotification or zero dollar entry.
    The FMS believes that the potential imposition of such liabilities
on financial institutions during the prenotification process is fair,
equitable, and a logical outgrowth of the NPRM. Specifically, the
preamble to the NPRM notified readers that the liability provisions
generally were geared towards placing liability for errors on the party
making the errors. The FMS believes that this principle serves two
important purposes here. First, it is an incentive for financial
institutions to process EFTPS payments in accordance with this Part,
which will help ensure that depository taxes are credited to the TGA on
tax due date. Second, it makes the United States whole for the lost
value of funds resulting from late tax payments. For example, a
financial institution receiving an ACH debit prenotification entry may
have little or no incentive to review and return timely a
prenotification entry containing an invalid account number if it can do
so without any financial exposure.

Acknowledgments

    NPRM Sec. 203.13(c)(4) required financial institutions originating
ACH credit tax payments to provide a transaction trace number to their
customers upon request. One commenter stated that the process for
assigning and providing a trace number is unclear and the numbers
provided by financial institution proprietary systems may not be
sufficient.
    The intent of this provision was to ensure that taxpayers have the
means to trace their tax payments at the IRS if there is some
discrepancy or problem. For example, in originating ACH credit entries,
financial institutions transmit to the IRS transaction trace numbers,
that are included in the IRS master file. If there is a question
between the IRS and the taxpayer as to the timeliness of a tax payment,
the taxpayer may obtain the transaction trace number from its financial
institution, and provide it to the IRS, which will then trace the
payment. The FMS seeks to protect the interests of taxpayers by
ensuring that they have a means of tracing their tax payments while at
the same time affording financial institutions maximum flexibility in
providing taxpayers with the means to do so. Accordingly,
Sec. 203.12(c)(4) of the Final Rule requires financial institutions to
provide their customers, upon request, either transaction trace numbers
or some other method to trace the tax payment.
    Four commenters recommended that Treasury implement a system to
provide electronic acknowledgments for ACH credit tax payments and
three commenters recommended that Treasury utilize the new ACH
acknowledgments (``ACK'' and ``ATX'') developed by NACHA. The FMS
currently is considering the operational implications of developing and
utilizing the new NACHA acknowledgments.
    Two of the commenters expressed concern over a perceived system
bias between the ACH debit and the ACH credit acknowledgment process.
The FMS believes that there is no system bias, and that taxpayers can
easily obtain ACH acknowledgment numbers for both ACH debit and credit
transactions. Specifically, EFTPS provides a taxpayer initiating an ACH
debit through the telephone or personal computer with an automated
response acknowledgment number at the end of the reporting session.
Taxpayers initiating an ACH credit transaction may obtain an ACH credit
acknowledgment number by placing a toll-free call to the EFTPS Customer
Service Centers on the tax due date.

ACH credit deadlines

    NPRM Sec. 203.13(c)(3) and the preamble to the NPRM left open the
possibility of a deadline different from that currently required for
ACH credit entries. In the preamble to the NPRM, the FMS suggested that
if a different ACH credit deadline were required, that deadline would
be approximately 11:00 p.m. on the day before the entry was to settle.
All of the commenters suggested that establishing an ACH credit
deadline for EFTPS payments that is different from the standard
deadline already in place for such entries would impose significant
operational problems for financial institutions and/or confuse
taxpayers/customers. The commenters were concerned that financial
institutions would be unaware that ACH files originated by its
customers would contain such tax payment credit entries subject to an
earlier deadline. Several commenters suggested that the establishment
of a separate deadline for EFTPS ACH credit payments may serve as a
disincentive for financial institutions to offer such services to their
taxpaying customers.
    Section 203.12(c)(3) of the Final Rule remains substantively
unchanged. The FMS needs the flexibility to change ACH credit deadlines
for purposes of maximizing the timely investment of tax

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receipts. However, the FMS emphasizes that it has no current plans to
impose a deadline different from the existing standard ACH processing
schedules. Moreover, the FMS would ensure that financial institutions
are provided with sufficient advance notice of any deadline changes so
that they may undertake any necessary steps to continue to process
timely ACH credit entries on behalf of their customers. While the FMS
recognizes the possibility that any deadline change may cause some
financial institutions to cease offering such services to their
customers, the FMS believes that the marketplace would fill any void.

ACH Credit Reversals

    NPRM Sec. 203.13(d) required advance IRS approval for all
corrections of ACH credit entries. In general, the commenters opposed
obtaining approval from the IRS for reversals of ACH credit entries,
remarking that obtaining approval from IRS is cumbersome; the requests
must be done manually and quickly; and that IRS could not respond
quickly enough to prevent financial institutions from losing the value
of funds. Several commenters suggested that the reversals be governed
by NACHA rules, which at that time did not require ACH credit
originators to notify receivers when initiating an ACH credit reversal.
    The FMS recognizes the merits of these comments, and has revised
the Final Rule. Specifically, Sec. 203.12(d) of the Final Rule
eliminates the need to obtain advance approval from the IRS before
originating an ACH credit reversal. A December 1997 NACHA rule change
requires an ACH originator to notify a receiver when making a reversing
entry to the receiver's account. For the reasons stated above, the
Final Rule does not require that IRS be notified when an ACH credit
reversal is initiated. However, financial institutions are reminded of
ACH record retention rules, and need to be able to provide
documentation per the requirements of the procedural instructions.

Same-day payments

    NPRM Sec. 203.14(a) proposed a 2:00 P.M. FRB head office local zone
time (LZT) deadline for all three same-day tax payment methods (Fedwire
value, Fedwire non-value, and Direct Access). One commenter requested
that the Fedwire deadline for Federal tax payments be the same as the
normal Fedwire national deadline currently established for third party
transactions (6:00 p.m. ET).
    The FMS believes that a uniform same-day payment cutoff time is
necessary to maximize and meet the needs of Treasury's investment
program. Under this program, Treasury invests tax payments with the
taxpayers' financial institutions in open-ended interest-bearing
obligations or ``note balances.'' In order for these financial
institutions to receive these investments, Treasury must designate and
employ them separately as Treasury Tax and Loan (TT&L) note
depositaries. The 2:00 p.m. LZT cutoff time is necessary to ensure that
EFTPS tax payments transmitted by these financial institutions via
Fedwire non-value and Direct Access are credited to their TT&L note
balances on the same day, thereby maximizing Treasury's investment
opportunities. Specifically, Fedwire non-value and Direct Access
transactions are settled through the Federal Reserve's TT&L system. The
2:00 p.m. LZT cutoff is necessary to provide time for the TT&L system
to process these two non-value transactions, and create the investment
entries to credit the note depositaries' balances.
    The FMS has decided to apply this same cutoff time to the Fedwire
value payment method because it is in the interest of the Treasury's
investment program that Fedwire value not be favored over the Fedwire
non-value and Direct Access options. Specifically, tax payments
remitted via the Fedwire value method are credited to Treasury's
General Account at the FRB and cannot be invested with note option
depositaries that day, thereby delaying Treasury's investment
opportunities. If the cutoff time for the Fedwire value payment method
was later than for the two non-value payment methods, informal
conversations with financial institutions and the TFAs indicate that
Fedwire value likely would be favored over the Fedwire non-value and
Direct Access payment methods which would have detrimental effects on
the Treasury's investment program.
    Consequently, the FMS has decided to retain the 2:00 p.m. LZT
cutoff time for all three same day payment methods. However,
Secs. 203.13(a), (e)(1)(i), and (e)(3) of the Final Rule delete
specific references to this cutoff time, and instead refer to the
procedural instructions that will contain the 2:00 p.m. LZT cutoff
time.
    Furthermore, the FMS currently is contemplating the adoption of a
uniform national cutoff time of 5:00 p.m. Eastern Time (ET) for all
same-day payments with a potential implementation date of mid-1999. The
possibility of a uniform cutoff time stems from the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994, Public Law
103-328, 108 Stat. 2338 (1994). Under this law, a financial institution
will have a single Federal Reserve account where its master account is
located. The location of this master account will determine the cutoff
time for all same-day Federal tax payments. If the FMS maintains the
2:00 p.m. LZT cutoff time, financial institutions with a master account
located on the West Coast would enjoy a competitive advantage in
attracting customers over financial institutions with a master account
on the East Coast due to the additional three hours for making a same-
day Federal tax payment. In order to prevent unfair business advantages
among financial institutions, the FMS is considering an FRB
recommendation to implement a uniform national cutoff time of 5:00 p.m.
ET for all same-day payments. If the FMS decides to adopt such a
uniform national cutoff time, the FMS will ensure that financial
institutions will be provided adequate advance notice to make any
necessary system changes.
    In the preamble to the NPRM, the FMS requested comments on
restricting the use of the Fedwire non-value and Direct Access same-day
payment methods to TT&L note depositaries. One commenter supported FMS'
underlying intent and five commenters opposed such restrictions. The
FMS has decided against imposing any restrictions, and all three same-
day mechanisms are available for use by any financial institution
capable of originating these transactions.
    Two commenters expressed concern over limiting the use of same-day
payment mechanisms to certain categories of taxpayers. This Final Rule
does not prescribe which payment methods taxpayers must use.
    NPRM Secs. 203.14(b), (c), and (d) provided that upon the request
of the taxpayer, the taxpayer's financial institution shall provide the
taxpayer with reference numbers for same-day transactions (the Input
Message Accountability Data (IMAD) number and the Electronic Tax
Application (ETA) reference number). For example, for Fedwire
transactions, the ETA reference number is assigned once the payment has
been received by the Federal Reserve's ETA. This number is provided to
the TFAs and the IRS at the end of each business day and is available
to originating financial institutions from their local FRB upon request
only. Taxpayers wishing to receive the IMAD or ETA reference numbers on
a day subsequent to the transaction date also may obtain such reference
numbers by contacting the EFTPS Customer Service Centers. One

[[Page 5648]]

commenter suggested that the IMAD and ETA reference numbers for same-
day payments should be provided to the taxpayer automatically.
    The FMS does not accept this comment, and as a result,
Secs. 203.13(b), (c), and (d) of the Final Rule remain substantively
unchanged. The FMS has weighed the needs of the taxpayers in receiving
such reference numbers against the burdens that would be imposed upon
financial institutions if the Final Rule were to require financial
institutions to provide taxpayers with such numbers automatically. This
Final Rule balances the needs of both parties by requiring financial
institutions to provide their customers with such reference numbers
upon the specific request of their customers. The FMS believes that to
mandate that financial institutions provide their customers with these
reference numbers in instances where the customer may not seek such
numbers would be unduly burdensome on financial institutions given
certain operational constraints. Taxpayers seeking such reference
numbers on a continuous basis should tailor their contracts with their
financial institutions to meet their needs.
    NPRM Sec. 203.14(e) defined the circumstances in which the FRB or
the IRS could reverse or cancel a same-day payment. Two commenters
recommended that taxpayers be contacted before the FRB or the IRS
cancel or reject a same-day payment.
    The FMS does not accept these comments. Therefore, section
203.13(e) of the Final Rule remains substantively unchanged. Due to the
time critical nature of the same-day payment mechanism, it is neither
feasible nor practicable to notify the taxpayer before a same-day
payment is reversed or canceled. Specifically, all same-day payments
are edited by the FRB's ETA, which will automatically reverse same-day
tax payments that are late, e.g., that are received after the ETA
deadline, or that are timely but do not contain enough information to
identify the taxpayer. The FRB also reverses same-day payments at the
direction of the IRS, which may direct a reversal in situations where a
payment cannot be posted in the IRS database because the TIN is
invalid, or where a taxpayer or financial institution have requested
the funds be returned because of an overpayment. The FRB also may
reverse or cancel tax payments at the request of the originating
financial institution if the request is received prior to the ETA
cutoff time on the transaction date.
    In all cases, the FMS believes that it is the responsibility of
financial institutions to notify their customers if same-day payments
are returned or canceled. This is especially important where timely
same-day payments are returned or canceled so that customers may
attempt to correct the payment prior to the cutoff time.

Interest Assessments for Lost Value of Funds

    NPRM Sec. 203.12(c) provided that Treasury will not pay interest on
any payments erroneously paid to Treasury and subsequently refunded to
the financial institution. Several commenters asked that Treasury
compensate financial institutions for the time value of funds held.
    The FMS rejects these comments, and, as a result, section 203.11(c)
of the Final Rule remains substantively unchanged. It is a well settled
principle that interest is not payable by the United States unless
expressly provided by statute or in a contract authorized by law. This
principle extends equally to situations where notions of equity would
seem to militate in favor of the United States paying interest.
Congress has expressly authorized the payment of interest for tax
refunds when the IRS pays without being sued and when a taxpayer
receives a judgment from a court for any overpayment of internal
revenue taxes. See 26 U.S.C. 6402 and 28 U.S.C. 2411 respectively.
    Because the FMS has not identified any statutory provision that
authorizes it to pay interest to financial institutions that make
erroneous payments that subsequently are refunded by Treasury, the FMS
is unable to compensate financial institutions for their lost value of
funds.
    NPRM Sec. 203.15 set forth the circumstances and procedures for the
assessment, calculation, and collection of interest from financial
institutions for purposes of making the United States whole for the
lost value of funds resulting from late tax payments. One commenter
suggested that only taxpayers be held liable for late tax payments.
Other commenters opposed the interest assessment provisions. One
commenter recommended that financial institutions only be penalized if
they transmit a certain number of late tax payments each year.
    The FMS does not accept these comments, and Sec. 203.14 of the
Final Rule remains substantively unchanged on these points. The
legislative scheme underlying EFTPS is to ensure that certain
depository taxes are credited to the TGA on the tax due date. If an
EFTPS tax payment is not credited to the TGA on the tax due date, the
IRS will impose a penalty on the taxpayer pursuant to 26 U.S.C. 6656.
However, IRS Revenue Ruling 94-46 (July 6, 1994) provides that the IRS
will abate this penalty if the taxpayer establishes that the
instructions the taxpayer provided to its financial institution were
timely and correct, and that it had sufficient funds to make the tax
payment. For example, the FMS understands that if the taxpayer did
everything right in initiating an ACH credit payment, but the
taxpayer's financial institution failed to originate the payment
timely, which resulted in a late tax payment, the IRS will abate the
penalty imposed upon the taxpayer. However, under these circumstances,
the United States will have lost the value of funds from the date the
taxpayer specified that its payment should settle to the TGA to the
time the late tax payment actually settled to the TGA.
    As a result, the FMS believes that to implement successfully the
legislative scheme underlying EFTPS, it may be necessary in these
circumstances to hold a financial institution liable for the lost value
of funds. Specifically, if a financial institution is not held liable
for its mistakes which result in a late tax payment, a financial
institution may have less incentive to process timely such tax payments
for credit to the TGA on the tax due date. The interest assessment in
most instances simply recovers the imputed value of funds erroneously
retained by the financial institution. The FMS further believes that
financial institutions can minimize this risk by imposing conditions on
their customers, and by initiating prenotification or zero dollar
entries.
    Nevertheless, the FMS will not assess interest on financial
institutions for errors resulting in late tax payments where such
errors occur before the effective date of this Final Rule.
    Furthermore, Sec. 203.14(b) of the Final Rule limits a financial
institution's interest liability to seven calendar days for ACH debit
transactions and 45 calendar days for both ACH credit and same-day
payment transactions. The FMS has established this cap in recognition
of the fact that taxpayers have a responsibility, upon learning of
their financial institution's error, to initiate a new payment
transaction. The seven calendar day cap for ACH debit transactions
stems from the fact that if the taxpayer's financial institution
returns the taxpayer's ACH debit transaction, the TFA will take
immediate steps to mail the taxpayer a notification letter. The FMS
believes that upon receipt of this letter from the TFA, the taxpayer
has a responsibility to initiate a new tax payment transaction. The FMS
also believes that this process generally should take no longer than

[[Page 5649]]

seven calendar days from the date the tax payment would have settled to
the TGA. The 45 day cap for ACH credit and same-day payment
transactions stems from the fact that if the TFA returns an ACH credit
transaction or if the FRB returns a same-day payment transaction to the
financial institution, the taxpayer, at the latest, will learn of the
return upon receipt of its monthly statement of account from its
financial institution. The 45 days is based upon an estimated 30 day
statement cycle, and 15 days processing and mail time.
    One commenter asked whether Treasury will assess interest on
financial institutions when the late tax payment is due to the ACH
operator, a system problem, a daylight overdraft, or other causes.
Whether the FMS will assess interest on a financial institution to make
the United States whole for the lost value of funds depends on the
specific facts and circumstances. Financial institutions will have the
right to contest any interest assessment under Sec. 203.16 of the Final
Rule.
    Several commenters asked for more specific information on the
interest assessment process. The specific procedures will be published
in the procedural instructions in the Treasury Financial Manual (TFM).
    NPRM Sec. 203.15(c) provided that a financial institution that
processes tax payments under this part is deemed to authorize the FRB,
acting as Treasury's fiscal agent, to debit its reserve account for
interest assessments. One commenter suggested that Treasury should not
initiate a debit to a financial institution's reserve account. Another
commenter suggested that Treasury give financial institutions an
opportunity to appeal the interest prior to paying it.
    The FMS does not accept these comments, and Sec. 203.14(c) of the
Final Rule remains substantively unchanged. The FMS believes that the
operational steps underlying the collection of interest assessments
will take several months from the date of the late tax payment due to
the extensive IRS research required. Because the FMS will not assess
``interest on interest,'' the FMS believes that affording a financial
institution an opportunity to contest the assessment prior to
collecting it only would exacerbate the lost value of funds to the
United States, especially in light of the cap on a financial
institution's liability at Sec. 203.14(b) of the Final Rule. Moreover,
Sec. 203.14(c) of the Final Rule, which authorizes the FMS to debit the
interest assessment from a financial institution's reserve account, is
consistent with the current process by which FMS recovers the lost
value of funds from financial institutions in the paper Federal Tax
Deposit (FTD) system. The FRB will send an electronic message to the
financial institution the day prior to the day that the financial
institution's reserve account is debited for the interest assessment.
    NPRM Sec. 203.15(d) and Sec. 203.14(d) of the Final Rule provide
that Treasury will not assess interest on a financial institution when
the taxpayer has not satisfied the conditions imposed by its financial
institution. Several commenters asked what information a financial
institution would need to provide to establish that the taxpayer failed
to meet the financial institution's conditions. The FMS has no pre-set
requirements; however, the FMS will consider such information as the
written conditions themselves; a saved electronic file; and/or a tape
of telephonic instructions showing the time and the direction to
initiate a transaction. The FMS will not regulate the agreements
between the financial institution and its customers, and therefore,
will not give guidance on the conditions a financial institution may
impose.
    One commenter asked if a financial institution must disclose to the
taxpayer its proof that the taxpayer failed to satisfy its requirements
for making an EFTPS payment. This part does not regulate the exchange
of information between a taxpayer and its financial institution.

Unauthorized Debits

    NPRM Sec. 203.16 prohibited financial institutions from initiating
debits to the TGA unless they had prior written permission. NPRM
Sec. 203.16 also provided that financial institutions that do initiate
such unauthorized debit entries are liable for the amount of the debit
and an interest charge at the Federal funds rate plus two percent, and
are deemed to authorize the Federal Reserve Bank to debit their reserve
accounts for the amount of the debit plus interest.
    One commenter pointed out that a customer theoretically could
initiate a debit to the TGA by using a customer delivery system, and
that a financial institution would suffer an undue burden if it had to
ensure that its customers could not initiate such debits. The FMS does
not accept this comment, and Sec. 203.15 of the Final Rule is
substantively unchanged on this point. The FMS believes that financial
institutions are responsible for how they allow their customers to key
in transaction information. This approach is consistent with commercial
operating rules, which generally provide that originating depository
financial institutions warrant that their entries are authorized by
both the originator and the receiver.
    However, should such a situation occur, the TFA will attempt to
return the unauthorized debit entry in time for same-day settlement. If
this return is made on the same day, there will be no need to recover
the principal nor will there be any interest charge. If the return is
not accomplished in the same day, the financial institution shall be
liable to the Treasury for the amount of the transaction and interest
charges calculated according to the procedural instructions published
in the TFM.
    One commenter stated that reversals should be excluded expressly
from this section. The FMS agrees and has clarified Sec. 203.15(a) of
the Final Rule.
    One commenter recommended that the interest charge assessed for an
unauthorized ACH debit be lowered to the Federal funds rate. The FMS
does not accept this comment and Sec. 203.15(d) of the Final Rule
remains substantively unchanged. This higher rate is intended to deter
unauthorized debits from the TGA.

Appeal and Dispute Resolution

    NPRM Sec. 203.17 afforded financial institutions the opportunity to
appeal an interest assessment under NPRM Sec. 203.15 or an interest
charge under NPRM Sec. 203.16. Several commenters requested an
explanation as to how this process would work. The FMS will provide
greater detail on these processes in its procedural instructions in the
TFM. Nevertheless, Sec. 203.16 of the Final Rule expands the
administrative remedies afforded financial institutions. Specifically,
if a financial institution is unsuccessful in contesting an interest
assessment, it may appeal the administrative denial to a higher level
Treasury official. This two-step administrative review process is
similar to the one currently used for the paper FTD system.

Compensation

    NPRM Sec. 203.19(a)(8) prohibited financial institutions serving as
TT&L depositaries from accepting compensation from taxpayers for
handling the deposit of tax payments in the paper FTD system. Three
commenters suggested that the FMS remove this prohibition. The FMS does
not accept this comment and Sec. 203.18 of the Final Rule is
substantively unchanged. While the FMS believes that such comments may
have merit, the NPRM did not give affected parties adequate notice of
this possibility. As a result, the FMS is constrained from accepting
these comments. However,

[[Page 5650]]

the FMS intends to issue an NPRM on removing this prohibition.
    Two commenters noted that the NPRM was silent on whether financial
institutions could charge taxpayers for processing tax payments under
EFTPS. These commenters recommended that the FMS expressly authorize
financial institutions to charge their customers for processing their
EFTPS tax payments. The FMS does not accept these comments, and the
Final Rule remains silent on whether financial institutions, acting as
the taxpayers' agents, can charge their customers for processing EFTPS
payments.
    The decision not to regulate the fees financial institutions can
charge under EFTPS stems from the fact that the EFTPS eliminates one of
the benefits currently provided financial institutions under the paper-
based FTD system. Specifically, when a taxpayer makes its tax payment
under the FTD system, the tax payment is deposited into a non-interest-
bearing TT&L account at the financial institution. The financial
institution retains the imputed value of these funds until the next day
when the funds either are credited to the TGA or are invested with the
financial institution in interest-bearing notes. Under EFTPS, these tax
payments will no longer be deposited overnight into such non-interest
bearing accounts, and the financial institutions will no longer retain
the value of these funds. The FMS believes that it is best left to the
marketplace to decide what fees, if any, financial institutions will
charge their customers. However, the FMS believes that any fees for ACH
credit or debit entries will be insignificant.

Collateral

    NPRM Sec. 203.25(f)(1) was modeled on existing Sec. 203.14(f)(1)
and provided that in the event of a TT&L depositary's insolvency or
closure, Treasury may apply the collateral pledged to satisfy any claim
of the United States. The NPRM preamble explained Treasury's
longstanding interpretation that ``any claim of the United States''
includes, but is not limited to, claims arising out of the depositary
relationship for which the collateral was originally pledged. One
commenter suggested that the TT&L collateral only be used to satisfy
TT&L claims. The FMS does not accept this comment, and the FMS'
interpretation of Sec. 203.24(f)(1) of the Final Rule remains
unchanged. The FMS believes that this interpretation is necessary to
protect the United States from loss.
    NPRM Sec. 203.25 set forth Treasury's collateral security
requirement for financial institutions serving as TT&L depositaries.
One commenter asked how a TT&L depositary would be notified of the
amount in the Note Option/Direct Investment account so that it could
deposit sufficient collateral to secure the deposits. This information
appears in the daily Federal Reserve account activity statement, which
the depositary can access after 9:00 a.m. ET via Fedline by using the
Accounting Services application and choosing the IAS Account Inquiry
option or by using the TT&L application and choosing the Host Account
Activity Report. Section 203.24 of the Final Rule provides that note
option depositaries that participate in the direct investment program
are not required to collateralize continuously the pre-established
maximum balance but must be prepared to pledge collateral on the day
the direct investment is placed.
    One commenter sought confirmation that same-day EFTPS payments
initiated by a financial institution serving as a TT&L depositary that
miss the cutoff time are not required to be collateralized. The
preamble of the NPRM stated that ``financial institutions processing
tax payments under the EFTPS . . . need not pledge collateral, unless
they elect to participate in Treasury's investment program.'' EFTPS
payments, including those that the depositary is unable to complete,
are not required to be collateralized.

Regulatory Analysis

    These regulations are not a significant regulatory action as
defined in Executive Order 12866. Accordingly, a regulatory assessment
is not required. It is hereby certified that this revision will not
have a significant economic impact on a substantial number of small
entities. Therefore, a regulatory flexibility analysis is not required.
This regulation will not impose significant costs on small entities. It
is further expected that such costs associated with electronic tax
payments will be offset by cost savings resulting from reductions in
the paperwork burden and the availability of a user-friendly electronic
tax collection system.

List of Subjects in 31 CFR Part 203

    Banks, Banking, Electronic Funds Transfers, Taxes.

    For the reasons set out in the preamble, 31 CFR part 203 is revised
to read as follows:

PART 203--PAYMENT OF FEDERAL TAXES AND THE TREASURY TAX AND LOAN
PROGRAM

Subpart A--General Information

Sec.
203.1  Scope.
203.2  Definitions.
203.3  Financial institution eligibility for designation as a
Treasury Tax and Loan depositary.
203.4  Designation of financial institutions as Treasury Tax and
Loan depositaries.
203.5  Obligations of the depositary.
203.6  Compensation for services.
203.7  Termination of agreement or change of election or option.
203.8  Application of part and procedural instructions.

Subpart B--Electronic Federal Tax Payments

203.9  Scope of the subpart.
203.10  Enrollment.
203.11  Electronic payment methods.
203.12  Future-day reporting and payment mechanisms.
203.13  Same-day reporting and payment mechanisms.
203.14  Electronic Federal Tax Payment System interest assessments.
203.15  Prohibited debits through the Automated Clearing House.
203.16  Appeal and dispute resolution.

Subpart C--Federal Tax Deposits.

203.17  Scope of the subpart.
203.18  Tax deposits using Federal Tax Deposit coupons.
203.19  Note option.
203.20  Remittance option.

Subpart D--Investment Program and Collateral Security Requirements
for Treasury Tax and Loan Depositaries

203.21  Scope of the subpart.
203.22  Sources of balances.
203.23  Note balance.
203.24  Collateral security requirements.

    Authority: 12 U.S.C. 90, 265-266, 332, 391, 1452(d), 1464(k),
1767, 1789a, 2013, 2122, and 3102; 26 U.S.C. 6302; 31 U.S.C. 321,
323 and 3301-3304.

Subpart A--General Information

Sec. 203.1  Scope.

    The regulations in this part govern the processing of Federal tax
payments by financial institutions and the Federal Reserve Banks (FRB)
using electronic payment or paper methods; the designation of Treasury
Tax and Loan (TT&L) depositaries; and the operation of the Department
of the Treasury's (Treasury) investment program.

Sec. 203.2  Definitions.

    As used in this part:
    (a) Advice of credit means the Treasury form used in the Federal
Tax

[[Page 5651]]

Deposit system that is supplied to depositaries to summarize and report
Federal tax deposits. The current form is Treasury Form 2284. Advice of
credit information also may be delivered electronically.
    (b) Automated Clearing House (ACH) credit entry means a transaction
originated by a financial institution in accordance with applicable ACH
formats and applicable laws, regulations, and procedural instructions.
    (c) Automated Clearing House (ACH) debit entry means a transaction
originated by a Treasury Financial Agent (TFA), in accordance with
applicable ACH formats and applicable laws, regulations, and
instructions.
    (d) Business day means any day on which the FRB of the district is
open.
    (e) Direct Access transaction means same-day Federal tax payment
information transmitted by a financial institution directly to the
Electronic Tax Application at an FRB using the Fedline Taxpayer Deposit
Application.
    (f) Direct investment means placement of Treasury funds with a
depositary and a corresponding increase in a depositary's note balance.
    (g) Electronic Federal Tax Payment System (EFTPS) means the system
through which taxpayers remit Federal tax payments electronically.
    (h) Electronic Tax Application (ETA) means a sub-system of EFTPS
that receives, processes, and transmits same-day Federal tax payment
information for taxpayers. ETA activity is comprised of Fedwire value
transfers, Fedwire non-value transactions, and Direct Access
transactions.
    (i) Electronic Tax Application (ETA) reference number means the
unique number assigned to each ETA transaction by an FRB.
    (j) Federal funds rate means the Federal funds rate published
weekly by the Board of Governors of the Federal Reserve System.
    (k) Federal Reserve account means an account with reserve or
clearing balances held by a financial institution at an FRB.
    (l) Federal Reserve Bank of the district means the FRB that
services the geographical area in which the financial institution is
located, or such other FRB that may be designated in an FRB operating
circular.
    (m) Federal Tax Deposit (FTD) means a tax deposit or payment made
using an FTD coupon.
    (n) Federal Tax Deposit coupon (FTD coupon) means a paper form
supplied to a taxpayer by the Treasury for use in the FTD system to
accompany deposits of Federal taxes. The current paper form is Form
8109.
    (o) Federal Tax Deposit system (FTD system) means the paper-based
system through which taxpayers remit Federal tax payments by presenting
an FTD coupon and payment to a depositary or an FRB. The depositary
prepares an advice of credit summarizing all FTDs.
    (p) Federal taxes means those Federal taxes or other payments
specified by the Secretary of the Treasury as eligible for payment
through the procedures prescribed in this part.
    (q) Fedwire means the funds transfer system owned and operated by
the FRBs.
    (r) Fedwire non-value transaction means the same-day Federal tax
payment information transmitted by a financial institution to an FRB
using a Fedwire type 1090 message to authorize a payment.
    (s) Fedwire value transfer means a Federal tax payment made by a
financial institution using a Fedwire type 1000 message.
    (t) Financial institution means any bank, savings bank, savings and
loan association, credit union, or similar institution.
    (u) Fiscal Agent means the Federal Reserve acting as agent for the
Treasury.
    (v) Input Message Accountability Data (IMAD) means a unique number
assigned to each Fedwire transaction by the financial institution
sending the transaction to an FRB.
    (w) Note option means that program available to a TT&L depositary
under which Treasury invests in obligations of the depositary. The
amount of such investments will be evidenced by an open-ended interest-
bearing note balance maintained at the FRB of the district.
    (x) Procedural instructions means the procedures contained in the
Treasury Financial Manual, Volume IV (IV TFM), other Treasury
instructions issued through the TFAs, and FRB operating circulars
issued consistent with this part.
    (y) Recognized insurance coverage means the insurance provided by
the Federal Deposit Insurance Corporation, the National Credit Union
Administration, and by insurance organizations specifically qualified
by the Secretary.
    (z) Remittance option means that program available to a depositary
that processes FTD payments, under which the amount of deposits
credited by the depositary to the TT&L account will be withdrawn by the
FRB for deposit to the Treasury General Account on the day that the FRB
receives the advices of credit supporting such deposits.
    (aa) Same-day payment means the following ETA payment options:
    (1) Direct Access transaction;
    (2) Fedwire non-value transaction; and
    (3) Fedwire value transfer.
    (bb) Secretary means the Secretary of the Treasury, or the
Secretary's delegate.
    (cc) Special direct investment means the placement of Treasury
funds with a depositary and a corresponding increase in a depositary's
note balance, where the investment specifically is identified as a
``special direct investment'' and may be secured by collateral retained
in the possession of the depositary pursuant to the terms of
Sec. 203.24(c)(2)(i).
    (dd) Tax due date means the day on which a tax payment is due to
Treasury, as determined by statute and Internal Revenue Service (IRS)
regulations.
    (ee) Transaction trace number means an identifying number assigned
by the taxpayer's financial institution to each ACH credit transaction.
    (ff) Treasury Financial Agent (TFA) means a financial institution
designated as an agent of Treasury for processing EFTPS enrollments,
receiving EFTPS tax payment information, and originating ACH debit
entries on behalf of Treasury as authorized by the taxpayer.
    (gg) Treasury General Account (TGA) means an account maintained in
the name of the United States Treasury at an FRB.
    (hh) Treasury Tax and Loan (TT&L) account means the Treasury
account maintained by a depositary in which funds are credited by the
depositary after receiving and collateralizing FTDs.
    (ii) Treasury Tax and Loan depositary (depositary) means a
financial institution designated as a depositary by the FRB of the
district for the purpose of maintaining a TT&L account and/or note
balance.
    (jj) Treasury Tax and Loan (TT&L) Program means the program for
collecting Federal taxes and investing the Government's excess
operating funds.
    (kk) Treasury Tax and Loan (TT&L) rate of interest means the
Federal funds rate less twenty-five basis points (i.e., \1/4\ of 1
percent).

Sec. 203.3  Financial institution eligibility for designation as a
Treasury Tax and Loan depositary.

    (a) To be designated as a TT&L depositary, a financial institution
shall be insured as a national banking association, state bank, savings
bank, savings and loan, building and loan, homestead association,
Federal home loan bank, credit union, trust company,

[[Page 5652]]

or a U.S. branch of a foreign banking corporation, the establishment of
which has been approved by the Comptroller of the Currency.
    (b) A financial institution shall possess the authority to pledge
collateral to secure TT&L account balances and/or a note balance.
    (c) In order to be designated as a TT&L depositary for the purposes
of processing tax deposits in the FTD system, a financial institution
shall possess under its charter either general or specific authority
permitting the maintenance of the TT&L account, the balance of which is
payable on demand without previous notice of intended withdrawal. In
addition, note option depositaries shall possess either general or
specific authority permitting the maintenance of a note balance, which
is payable on demand without previous notice of intended withdrawal.

Sec. 203.4  Designation of financial institutions as Treasury Tax and
Loan depositaries.

    (a) Parties to the agreement. To be designated as a TT&L
depositary, a financial institution shall enter into a depositary
agreement with Treasury's fiscal agent, the FRB. By entering into this
agreement, the financial institution agrees to be bound by this part,
and procedural instructions issued pursuant to this part.
    (b)(1) Application procedures. An eligible financial institution
seeking designation as a depositary and, thereby, the authority to
maintain a TT&L account and/or a note balance shall file with the FRB,
Financial Management Service Form 458, ``Financial Institution
Agreement and Application for Designation as a TT&L Depositary,'' and
Financial Management Service Form 459, ``Resolution Authorizing the
Financial Institution Agreement and Application for Designation as a
TT&L Depositary,'' certified by its board of directors. Financial
Management Service Forms 458 and 459 are available upon request from
the FRB of the district.
    (2) Depositaries processing tax payments in the FTD system are
required to elect either the remittance or the note option.
    (c) Designation. Each financial institution satisfying the
eligibility requirements and the application procedures will receive
from the FRB notification of its specific designation as a TT&L
depositary. A financial institution is not authorized to maintain a
TT&L account or note balance until it has been designated as a TT&L
depositary by the FRB.

Sec. 203.5  Obligations of the depositary.

    A depositary shall:
    (a) Administer a note balance, if not participating in the FTD
System.
    (b) Administer a TT&L account and, if applicable, a note balance,
if participating in the FTD System.
    (c) Comply with the requirements of Section 202 of Executive Order
11246, entitled ``Equal Employment Opportunity'' (3 CFR, 1964-1965
Comp. p. 339) as amended by Executive Orders 11375 and 12086 (3 CFR,
1966-1970 Comp., p. 684; 3 CFR, 1978 Comp. p. 230), and the regulations
issued thereunder at 41 CFR Chapter 60.
    (d) Comply with the requirements of Section 503 of the
Rehabilitation Act of 1973, as amended, and the regulations issued
thereunder at 41 CFR part 60-741, requiring Federal contractors to take
affirmative action to employ and advance in employment qualified
individuals with disabilities.
    (e) Comply with the requirements of Section 503 of the Vietnam Era
Veterans' Readjustment Assistance Act of 1972, as amended, 38 U.S.C.
4212, Executive Order 11701 (3 CFR 1971-1975 Comp. p. 752), and the
regulations issued thereunder at 41 CFR parts 60-250 and 61-250,
requiring Federal contractors to take affirmative action to employ and
advance in employment qualified special disabled veterans and Vietnam-
era veterans.

Sec. 203.6  Compensation for services.

    Except as provided in the procedural instructions, Treasury will
not compensate financial institutions for servicing and maintaining the
TT&L account, or for processing tax payments through the EFTPS or the
FTD system.

Sec. 203.7  Termination of agreement or change of election or option.

    (a) Termination by Treasury. The Secretary may terminate the
agreement of a depositary at any time upon notice to that effect to
that depositary, effective on the date set forth in the notice.
    (b) Termination or change of election or option by the depositary.
A depositary may terminate its depositary agreement, or change its
option or election, consistent with this part and the procedural
instructions, by submitting notice to that effect in writing to the FRB
effective at a prospective date set forth in the notice.

Sec. 203.8  Application of part and procedural instructions.

    The terms of this part and procedural instructions issued pursuant
to this part shall be binding on financial institutions that process
tax payments and/or maintain a note balance under this part. By
accepting or originating Federal tax payments, the financial
institution agrees to be bound by this part and by procedural
instructions issued pursuant to this part.

Subpart B--Electronic Federal Tax Payments

Sec. 203.9  Scope of the subpart.

    This subpart prescribes the rules by which financial institutions
shall process Federal tax payment transactions electronically. A
financial institution does not need to be designated as a TT&L
depositary in order to process electronic Federal tax payments. In
addition, a financial institution that does process electronic Federal
tax payments under this subpart does not thereby become a Federal
Government depositary and shall not advertise itself as one because of
that fact.

Sec. 203.10  Enrollment.

    (a) General. Taxpayers shall complete an enrollment process with
the TFA prior to making their first electronic Federal tax payment.
    (b) Enrollment forms. The TFA shall provide financial institutions
and taxpayers with enrollment forms upon request. The taxpayer is
responsible for completing the enrollment form, obtaining the
verifications required on the form, and returning the enrollment form
to the TFA.
    (c) Verification. If the taxpayer elects the ACH debit entry method
of paying taxes, an authorized representative of the financial
institution shall verify the accuracy of the financial institution
routing number, taxpayer account number, and taxpayer account type at
the request of the taxpayer.

Sec. 203.11  Electronic payment methods.

    (a) General. Electronic payment methods for Federal tax payments
available under this subpart include ACH debit entries, ACH credit
entries, and same-day payments. Any financial institution that is
capable of originating and/or receiving transactions for these payment
methods, by itself or through a correspondent financial institution,
may do so on behalf of a taxpayer.
    (b) Conditions to making an electronic payment. Nothing contained
in this part shall affect the authority of financial institutions to
enter into contracts with their customers regarding the terms and
conditions for processing payments, provided that such terms and
conditions are not inconsistent with this subpart and applicable law
governing the particular transaction type.
    (c) Payment of interest for time value of funds held. Treasury will
not pay

[[Page 5653]]

interest on any payments erroneously paid to Treasury and subsequently
refunded to the financial institution.

Sec. 203.12  Future-day reporting and payment mechanisms.

    (a) General. A financial institution may receive an ACH debit
entry, originated by the TFA at the direction of the taxpayer; or, a
financial institution may originate an ACH credit entry, at the
direction of the taxpayer. Taxpayers will be credited for the actual
amount received by Treasury.
    (b) ACH debit. A financial institution receiving an ACH debit entry
originated by the TFA shall, as applicable:
    (1) Timely verify the account number and account type contained in
an ACH prenotification entry;
    (2) Timely and properly return a prenotification entry that
contains an invalid account number or account type, or otherwise is
erroneous or unprocessable;
    (3) Timely and accurately notify the TFA of incorrect information
on entries received, using a Notification of Change entry; and
    (4) Timely and accurately return an entry not posted, including but
not limited to, a return or a contested dishonored return for
acceptable return reasons, as set forth in the procedural instructions.
    (c) ACH credit. A financial institution originating an ACH credit
entry at the direction of a taxpayer shall:
    (1) At the request of the taxpayer, originate either an ACH
prenotification containing the taxpayer's identification number or a
zero dollar ACH entry with the appropriate addenda record. Additional
format information is contained in the procedural instructions;
    (2) Format the ACH credit entry in the ACH format approved by
Treasury for Federal tax payments;
    (3) Originate an ACH credit entry by the appropriate deadline, as
specified by the FRB or Treasury, whichever is earlier, in order to
meet the tax due date specified by the taxpayer; and
    (4) Provide the taxpayer, upon request, a transaction trace number,
or some other method to trace the tax payment.
    (d) ACH credit reversals. Reversals may be initiated for a
duplicate or erroneous file or entry. No advance approval from, or
notification to, the IRS is required when originating an ACH credit
reversal. Documentation of reversals shall be made available as set
forth in the procedural instructions.

Sec. 203.13  Same-day reporting and payment mechanisms.

    (a) General. A financial institution or its authorized
correspondent may initiate same-day reporting and payment transactions
on behalf of taxpayers. A same-day payment must be received by the FRB
of the district by the deadline established by the Treasury in the
procedural instructions. Taxpayers will be credited for the actual
amount received by Treasury.
    (b) Fedwire value transfer. To initiate a Fedwire value tax
payment, the financial institution shall be a Fedwire participant and
shall comply with the FRB's Fedwire format for tax payments. The
taxpayer's financial institution shall provide the taxpayer, upon
request, the IMAD and the ETA reference numbers for a Fedwire value
transfer. The financial institution may obtain the ETA reference number
for Fedwire value transfers from its FRB by supplying the related IMAD
number. Fedwire value transfers settle immediately to the TGA and thus
are not credited to a depositary's note balance.
    (c) Fedwire non-value transaction. By initiating a Fedwire non-
value transaction, a financial institution authorizes the FRB of the
district to debit its Federal Reserve account or, for a TT&L
depositary, to debit the Federal Reserve account of the depositary or
its designated correspondent financial institution, for the amount of
the tax payment specified in the transaction. To initiate a Fedwire
non-value transaction, the financial institution shall be a Fedwire
participant and shall comply with the FRB's Fedwire format for tax
payments. The taxpayer's financial institution shall provide the
taxpayer, upon request, the IMAD and ETA reference numbers for the
Fedwire non-value transaction. The financial institution may obtain the
ETA reference number for Fedwire non-value transactions from its FRB by
supplying the related IMAD number.
    (1) For a note option depositary using a Fedwire non-value
transaction, the tax payment amount will be credited to the
depositary's note balance on the day of the transaction.
    (2) For a remittance option depositary using a Fedwire non-value
transaction, the tax payment amount will be debited from the Federal
Reserve account of the depositary or the depositary's designated
correspondent and credited to the TGA on the day of the transaction.
    (3) For a non-TT&L depositary financial institution using a Fedwire
non-value transaction, the tax payment amount will be debited from the
financial institution's Federal Reserve account and credited to the TGA
on the day of the transaction.
    (d) Direct Access Transaction. By initiating a Direct Access
transaction, a financial institution authorizes the FRB of the district
to debit its Federal Reserve account or, for a TT&L depositary, to
debit the Federal Reserve account of the depositary or its designated
correspondent financial institution for the amount of the tax payment
specified in the transaction. The taxpayer's financial institution
shall provide the taxpayer, upon request, the ETA reference number for
the Direct Access transaction.
    (1) For a note option depositary using a Direct Access transaction,
the tax payment amount will be credited to the depositary's note
balance on the day of the transaction.
    (2) For a remittance option depositary or a non-TT&L depositary
financial institution using a Direct Access transaction, the tax
payment amount will be debited from the Federal Reserve account of the
financial institution or its designated correspondent financial
institution, and credited to the TGA on the day of the transaction.
    (e) Cancellations and reversals. In addition to cancellations due
to insufficient funds in the financial institution's Federal Reserve
account, the FRB may reverse a same-day transaction:
    (1) If the transaction:
    (i) Is originated by a financial institution after the deadline
established by the Treasury in the procedural instructions;
    (ii) Has an unenrolled taxpayer identification number; or
    (iii) Does not meet the edit and format requirements set forth in
the procedural instructions; or,
    (2) At the direction of the IRS, for the following reasons:
    (i) Incorrect taxpayer name;
    (ii) Overpayment; or
    (iii) Unidentified payment; or,
    (3) At the request of the financial institution that sent the same-
day transaction, if the request is made prior to the deadline
established by Treasury in the procedural instructions on the day the
payment was made.
    (f) Other than as stated in paragraph (e) of this section, Treasury
is not obligated to reverse all or any part of a payment.

Sec. 203.14  Electronic Federal Tax Payment System interest
assessments.

    (a) Circumstances subject to interest assessments. Treasury may
assess interest on a financial institution in instances where a
taxpayer that failed to meet a tax due date proves to the IRS

[[Page 5654]]

that the delivery of tax payment instructions to the financial
institution was timely and that the taxpayer satisfied the conditions
imposed by the financial institution pursuant to Sec. 203.11(b).
Treasury also may assess interest where a financial institution failed
to respond to an ACH prenotification entry on an ACH debit as required
in Sec. 203.12(b) or failed to originate an ACH prenotification or zero
dollar entry on an ACH credit as described in Sec. 203.12(c) which then
resulted in a late payment.
    (b) Calculation of interest assessment. Any interest assessed under
this section will be at the TT&L rate. The interest will be assessed
from the day the taxpayer specified that its payment should settle to
the Treasury until the receipt of the payment by Treasury, subject to
the following limitations: For ACH debit transactions, interest will be
limited to no more than seven calendar days; for ACH credit and same-
day transactions, interest will be limited to no more than 45 calendar
days. The limitation of liability in this paragraph does not apply to
any interest assessment in which there is an indication of fraud, the
presentation of a false claim, or misrepresentation or embezzlement on
the part of the financial institution or any employee or agent of the
financial institution.
    (c) Authorization to assess interest. A financial institution that
processes Federal tax payments made by electronic payment methods under
this subpart is deemed to authorize the FRB to debit its Federal
Reserve account or the account of its designated correspondent
financial institution for any interest assessed under this section.
Upon the direction of Treasury, the FRB shall debit the Federal Reserve
account of the financial institution or the account of its designated
correspondent financial institution for the amount of the assessed
interest.
    (d)(1) Circumstances not subject to the assessment of interest. (1)
Treasury will not assess interest on a taxpayer's financial institution
if a taxpayer fails to meet a tax due date because the taxpayer has not
satisfied conditions imposed by the financial institution pursuant to
Sec. 203.11(b) and the financial institution has not contributed to the
delay. The burden is on the financial institution to establish,
pursuant to the procedures in Sec. 203.16, that the taxpayer has not
satisfied the conditions and that the financial institution has not
contributed to the delay.
    (2) Treasury will not assess interest on a financial institution if
the delay causing the interest assessment is due to the FRB or the TFA
and the financial institution did not contribute to the delay. The
burden is on the financial institution to establish, pursuant to the
procedures in Sec. 203.16, that it did not cause or contribute to the
delay.

Sec. 203.15  Prohibited debits through the Automated Clearing House.

    (a) General. The Treasury has instituted operational safeguards to
scrutinize all entries that remove funds from the TGA. In the event
funds are removed from the TGA without authority, this section sets
forth the liability of financial institutions originating such entries.
Accordingly, a financial institution shall not originate an ACH
transaction to debit the TGA without the prior written permission of
Treasury. Unauthorized entries under this section do not include
reversal entries of previously initiated ACH credits authorized in
Sec. 203.12(d).
    (b) Liability. A financial institution that originates an
unauthorized ACH entry that debits the TGA shall be liable to Treasury
for the amount of the transaction and shall be liable for interest
charges as specified in paragraph (d) of this section.
    (c) Authorization to recover principal and assess interest charge.
By initiating unauthorized debits to the TGA through the ACH, a
financial institution is deemed to authorize the FRB to debit its
Federal Reserve account or the account of its designated correspondent
financial institution for any principal and, if applicable, an interest
charge assessed by Treasury under this section.
    (d) Interest charge calculation. The interest charge shall be at a
rate equal to the Federal funds rate plus two percent. The interest
charge shall be assessed for each calendar day from the day the TGA was
debited to the day the TGA is recredited with the full amount of
principal due.

Sec. 203.16  Appeal and dispute resolution.

    (a) Contest. A financial institution may contest any interest
assessed under Sec. 203.14, any principal or interest assessed under
Sec. 203.15, or any late fees assessed under Sec. 203.20. The financial
institution shall submit information supporting its position and the
relief sought. The information must be received, in writing, by the
Treasury officer or fiscal agent identified in the procedural
instructions, no later than 90 calendar days after the date the FRB
debits the reserve account of the financial institution under
Secs. 203.14, 203.15, or 203.20. The Treasury officer or fiscal agent
will: uphold the assessment, or reverse the assessment, or modify the
assessment, or mandate other action.
    (b) Appeal. The financial institution may appeal the decision to
Treasury as set forth in the procedural instructions. No further
administrative review of the Treasury's decision is available under
this Part.
    (c) Recoveries. In the event of an over or under recovery of either
interest, principal, or late fees, Treasury will instruct the FRB to
credit or debit the Federal Reserve account of the financial
institution or its designated correspondent financial institution, as
appropriate.

Subpart C--Federal Tax Deposits

Sec. 203.17  Scope of the subpart.

    This subpart applies to all depositaries that accept FTD coupons
and governs the acceptance and processing of those coupons.

Sec. 203.18  Tax deposits using Federal Tax Deposit coupons.

    (a) FTD coupons. A depositary that accepts FTD coupons, through any
of its offices that accept demand and/or savings deposits, shall:
    (1) Accept from a taxpayer, cash, a postal money order drawn to the
order of the depositary, or a check or draft drawn on and to the order
of the depositary, covering an amount to be deposited as Federal taxes
when accompanied by an FTD coupon on which the amount of the deposit
has been properly entered in the space provided. A depositary may
accept, at its discretion, a check drawn on another financial
institution, but it does so at its option and absorbs for its own
account any float and other costs involved.
    (2) Issue a counter receipt when requested to do so by a taxpayer
that makes an FTD deposit over the counter.
    (3) Place a stamp impression on the face of each FTD coupon in the
space provided. The stamp shall reflect the date on which the tax
deposit was received and the name and location of the depositary. The
timeliness of the tax payment will be determined by reference to the
date stamped by the depositary on the FTD coupon.
    (4) Credit, on the date of receipt, all FTD deposits to the TT&L
account and administer that account pursuant to the provisions of this
part.
    (5) Forward, each day, to the IRS Center servicing the geographical
area in which the depositary is located, the FTD coupons for all FTD
deposits received that day. The FTD coupons shall be accompanied by an
advice of credit reflecting the total amount of all FTD coupons.
    (6) Establish an adequate record of all FTD deposits prior to
transmittal to the

[[Page 5655]]

IRS Center so that the depositary will be able to identify deposits in
the event tax deposit coupons are lost in shipment. For tracking
purposes, a record shall be made of each FTD deposit showing, at a
minimum, the date of deposit, the taxpayer identification number, and
the amount of the deposit. The depositary's copy of the advice of
credit may be used to provide the necessary information if individual
deposits are listed separately, showing date, taxpayer identification
number, and amount.
    (7) Deliver its advices of credit to the FRB by the cutoff hour
designated by the FRB for receipt of advices.
    (8) Not accept compensation from taxpayers for accepting FTDs and
handling them as required by this section.
    (b) FTD deposits with Federal Reserve Banks. An FRB shall:
    (1) Accept an FTD directly from a taxpayer when such tax deposit
is:
    (i) Mailed or delivered by a taxpayer; and
    (ii) Provided in the form of cash or a check or postal money order
payable to the order of that FRB; and,
    (iii) Accompanied by an FTD coupon on which the amount of the tax
deposit has been properly entered in the space provided.
    (2) Issue a counter receipt, when requested to do so by a taxpayer
that makes an FTD over the counter; and,
    (3) Place, in the space provided on the face of each FTD coupon
accepted directly from a taxpayer, a stamp impression reflecting the
name of the FRB and the date on which the tax deposit will be credited
to the TGA. Timeliness of the Federal tax payment will be determined by
this date. However, if a deposit is mailed to an FRB, it shall be
subject to the ``Timely mailing treated as timely filing and paying''
clause of the Internal Revenue Code, 26 U.S.C. 7502; and,
    (4) Credit the TGA with the amount of the tax payment;
    (i) On the date the payment is received, if payment is made in
cash; or,
    (ii) On the date the proceeds of the tax payment are collected, if
payment is made by postal money order or check.

Sec. 203.19  Note option.

    (a) Late delivery of advices of credit. If an advice of credit does
not arrive at the FRB before the designated cutoff hour for receipt of
such advices, the FRB will post the funds to the note balance as of the
next business day after the date on the advice of credit. This is the
date on which funds will begin to earn interest for Treasury.
    (b) Transfer of funds from TT&L account to the note balance. For a
depositary selecting the note option, funds equivalent to the amount of
deposits credited by a depositary to the TT&L account shall be
withdrawn by the depositary and credited to the note balance on the
business day following the receipt of the tax payment.

Sec. 203.20  Remittance option.

    (a) FTD late fee. If an advice of credit does not arrive at the FRB
before the designated cutoff hour for receipt of such advices, an FTD
late fee in the form of interest at the TT&L rate will be assessed for
each day's delay in receipt of such advice. Upon the direction of
Treasury, the FRB shall debit the Federal Reserve account of the
financial institution or the account of its designated correspondent
financial institution for the amount of the late fee.
    (b) Withdrawals. For a depositary selecting the Remittance Option,
the amount of deposits credited by a depositary to the TT&L account
will be withdrawn upon receipt by the FRB of the advices of credit. The
FRB will charge the depositary's Federal Reserve account or the account
of the depositary's designated correspondent financial institution.

Subpart D--Investment Program and Collateral Security Requirements
for Treasury Tax and Loan Depositaries

Sec. 203.21  Scope of the subpart.

    This subpart provides rules for TT&L depositaries on crediting note
balances under the various payment methods; debiting note balances; and
pledging collateral security.

Sec. 203.22  Sources of balances.

    Depositaries electing to participate in the investment program can
receive Treasury's investments in obligations of the depositary from
the following sources:
    (a) FTDs that have been credited to the TT&L account pursuant to
subpart C of this part;
    (b) EFTPS ACH credit and debit transactions, Fedwire non-value
transactions, and Direct Access transactions pursuant to subpart B of
this part; and
    (c) Direct investments and special direct investments pursuant to
subpart D of this part.

Sec. 203.23  Note balance.

    (a) Additions. Treasury will invest funds in obligations of
depositaries selecting the note option. Such obligations shall be in
the form of open-ended, interest-bearing notes; and additions and
reductions will be reflected on the books of the FRB of the district.
    (1) FTD system. A depositary processing tax deposits using the FTD
system and electing the note option shall debit the TT&L account and
credit its note balance as stated in Sec. 203.19(b).
    (2) EFTPS.
    (i) ACH debit and ACH credit. A note option depositary processing
EFTPS ACH debit entries and/or ACH credit entries shall credit its note
balance for the value of the transactions on the date that an exchange
of funds is reflected on the books of the Federal Reserve Bank of the
district. Financial institutions may refer to the procedural
instructions for information on how to ascertain the amount of the
credit to the note balance.
    (ii) Fedwire non-value and Direct Access. A note option depositary
processing Fedwire non-value and/or Direct Access transactions pursuant
to subpart B of this part shall credit its note balance and debit its
customer's account for the value of the transactions on the date ETA
receives and processes the transactions.
    (b) Other additions. Other funds from Treasury may be offered from
time to time to certain note option depositaries through direct
investments, special direct investments, or other investment programs.
    (c) Note balance withdrawals. The amount of the note balance shall
be payable on demand without prior notice. Calls for payment on the
note will be by direction of the Secretary through the FRBs. On behalf
of Treasury, the FRB shall charge the reserve account of the depositary
or the depositary's designated correspondent on the day specified in
the call for payment.
    (d) Interest. A note shall bear interest at the TT&L rate. Such
interest is payable by a charge to the Federal Reserve account of the
depositary or its designated correspondent in the manner prescribed in
the procedural instructions.
    (e) Maximum balance.
    (1) Note option depositaries. A depositary selecting the note
option shall establish a maximum balance for its note by providing
notice to that effect in writing to the FRB of the district. The
maximum balance is the amount of funds for which a note option
depositary is willing to provide collateral in accordance with
Sec. 203.24(c)(1). The depositary shall provide the advance notice
required in the procedural instructions before reducing the established
maximum balance unless it is a reduction resulting from a collateral
re-evaluation as determined by the depositary's FRB. That portion of
any advice of credit or EFTPS tax payment, which, when

[[Page 5656]]

posted at the FRB, would cause the note balance to exceed the maximum
balance amount specified by the depositary, will be withdrawn by the
FRB that day.
    (2) Direct investment depositaries. A note option depositary that
participates in direct investment shall set a maximum balance for
direct investment purposes which is higher than its peak balance
normally generated by the depositary's advices of credit and EFTPS tax
payment inflow. The direct investment note option depositary shall
provide the advance notice required in the procedural instructions
before reducing the established maximum balance.
    (3) Special direct investment depositaries. Special direct
investments, while credited to the note balance, shall not be
considered in setting the amount of the maximum balance or in
determining the amounts to be withdrawn where a depositary's maximum
balance is exceeded.

Sec. 203.24  Collateral security requirements.

    Financial institutions that process EFTPS tax payments, but are not
TT&L depositaries, have no collateral requirements under this part.
Financial institutions that are note option depositaries or remittance
option depositaries have collateral security requirements, as follows:
    (a) Note option.
    (1) FTD deposits and EFTPS tax payments. A depositary shall pledge
collateral security in accordance with the requirements of paragraphs
(c)(1), (d), and (e) of this section in an amount that is sufficient to
cover the pre-established maximum balance for the note, and, if
applicable, the closing balance in the TT&L account which exceeds
recognized insurance coverage. Depositaries shall pledge collateral for
the full amount of the maximum balance at the time the maximum balance
is established. If the depositary maintains a TT&L account, the
depositary shall pledge collateral security before crediting deposits
to the TT&L account.
    (2) Direct investments. A note option depositary that participates
in direct investment is not required to pledge collateral continuously
in the amount of the pre-established maximum balance. However, each
note option depositary participating in direct investment shall pledge,
no later than the day the direct investment is placed, the additional
collateral in accordance with paragraphs (c)(1), (d), and (e) of this
section to cover the total note balance including those funds received
through direct investment. If a direct investment depositary has a
history of frequent collateral deficiencies, it shall fully
collateralize its maximum balance at all times.
    (3) Special direct investments. Before special direct investments
are credited to a depositary's note balance, the note option depositary
shall pledge collateral security, in accordance with the requirements
of paragraphs (c)(2) and (e) of this section, to cover 100 percent of
the amount of the special direct investments to be received.
    (b) Remittance option. Prior to crediting FTD deposits to the TT&L
account, a remittance option depositary shall pledge collateral
security in accordance with the requirements of paragraph (c)(1), (d),
and (e) of this section in an amount which is sufficient to cover the
balance in the TT&L account at the close of business each day, less
recognized insurance coverage.
    (c) Deposits of securities.
    (1) Collateral security required under paragraphs (a)(1), (2), and
(b) of this section shall be deposited with the FRB of the district, or
with a custodian or custodians within the United States designated by
the FRB, under terms and conditions prescribed by the FRB.
    (2)(i) Collateral security required under paragraph (a)(3) of this
section shall be pledged under a written security agreement on a form
provided by the FRB of the district. The collateral security pledged to
satisfy the requirements of paragraph (a)(3) of this section may remain
in the pledging depositary's possession and the fact that it has been
pledged shall be evidenced by advices of custody to be incorporated by
reference in the written security agreement. The written security
agreement and all advices of custody covering collateral security
pledged under that agreement shall be provided by the depositary to the
FRB of the district. Collateral security pledged under the agreement
shall not be substituted for or released without the advance approval
of the FRB of the district, and any collateral security subject to the
security agreement shall remain so subject until an approved
substitution is made. No substitution or release shall be approved
until an advice of custody containing the description required by the
written security agreement is received by the FRB of the district.
    (ii) Treasury's security interest in collateral security pledged by
a depositary in accordance with paragraph (c)(2)(i) of this section to
secure special direct investments is perfected without Treasury taking
possession of the collateral security for a period not to exceed 21
calendar days from the day of the depositary's receipt of the special
direct investment.
    (d) Acceptable securities. Unless otherwise specified by the
Secretary, collateral security pledged under this section may be
transferable securities, owned by the depositary free and clear of all
liens, charges, or claims, of any of the classes listed in the
procedural instructions. Collateral values will be assigned by the FRB
of the district.
    (e) Assignment of securities. A TT&L depositary that pledges
acceptable securities which are not negotiable without its endorsement
or assignment may furnish, in lieu of placing its unqualified
endorsement on each security, an appropriate resolution and irrevocable
power of attorney authorizing the FRB to assign the securities. The
resolution and power of attorney shall conform to such terms and
conditions as the FRB shall prescribe.
    (f) Effecting payments of principal and interest on securities
pledged as collateral.
    (1) General. If the depositary fails to pay, when due, the whole or
any part of the funds received by it for credit to the TT&L account,
and/or if applicable, its note balance; or otherwise violates or fails
to perform any of the terms of this part, or fails to pay when due
amounts owed to the United States or the United States Treasury; or if
the depositary is closed for business by regulatory action or by proper
corporate action, or in the event that a receiver, conservator,
liquidator or any other officer is appointed; then the Treasury,
without notice or demand, may sell, or otherwise collect the proceeds
of all or part of the collateral, including additions and
substitutions; and apply the proceeds, to satisfy any claims of the
United States against the depositary. All principal and interest
payments on any security pledged to protect the note balance (if
applicable) and/or the TT&L account (if applicable), due as of the date
of the insolvency or closure, or thereafter becoming due, shall be held
separate and apart from any other assets and shall constitute a part of
the pledged security available to satisfy any claim of the United
States.
    (2) Payment procedures.
    (i) Subject to the waiver in paragraph (f)(2)(iii) of this section,
each depositary (including, with respect to such depositary, an
assignee for the benefit of creditors, a trustee in bankruptcy, or a
receiver in equity) shall immediately remit each payment of principal
and/or interest received by it with respect to collateral pledged
pursuant to this section to the FRB of the district, as fiscal agent of
the United States, and in

[[Page 5657]]

any event shall so remit no later than 10 days after receipt of such a
payment.
    (ii) Subject to the waiver in paragraph (f)(2)(iii) of this
section, each obligor on a security pledged by a depositary pursuant to
this section, upon notification that the Treasury is entitled to any
payment associated with that pledged security, shall make each payment
of principal and/or interest due with respect to such security directly
to the FRB of the district, as fiscal agent of the United States.
    (iii) The requirements of paragraphs (f)(2)(i) and (ii) of this
section are hereby waived for only so long as a pledging depositary
avoids both termination from the program under Sec. 203.7; and also,
those circumstances identified in paragraph (f)(1) which may lead to
the collection of the proceeds of collateral or the waiver is otherwise
terminated by Treasury.

    Dated: January 27, 1998.
Richard L. Gregg,
Acting Commissioner.
[FR Doc. 98-2494 Filed 2-2-98; 8:45 am]
BILLING CODE 4810-35-P